Make America Grow Again?

The Bureau of Economic Analysis (BEA), part of the Department of Commerce, released its second estimate of fourth-quarter gross domestic product (GDP) growth on February 28th. The agency estimated that the U.S. economy expanded by 2.5% in real terms – that is, adjusted for inflation – in the last three months of 2017. That figure is annualized and adjusted for seasonal variability.

The BEA will release its third and final estimate at the end of March, so this figure should be considered preliminary. It does, however, reflect more data than the initial estimate of 2.6%.

The BEA found that consumer spending – about 70% of the economy – was solid, accompanied by healthy growth in wages. Business investment also expanded, and government spending was a significant driver of growth. An increase in imports, which subtract from growth calculations, and shrinking private inventory investment dragged on net output though. (See also, What Is GDP and Why Is It So Important?)

The fourth quarter marks the economy's 32nd consecutive quarter of positive net output. Not bad, but the rate of growth is less than inspiring. The mid-to-late 20th century saw much higher rates though recessions were more frequent. Trump hit on this sluggishness during the campaign, promising to bring growth rates back to 4%, 5%, or even 6%. The administration's economic forecasts have not been quite that optimistic, but they've been considerably higher than the Fed's. (See also, Obama's Economic Legacy in 8 Charts.)

While the stock market's been on a tear since Trump's election, the economy itself has not yet expressed the same enthusiasm. There are signs, though, that that's beginning to change. As unemployment remains low, wages have begun to rise, putting pressure on puzzlingly weak inflation. Trump's tax cuts, which give a permanent boost to business and a temporary one to households, is expected to lend some short-term oomph to economic growth.

Ironically, markets have been spooked by precisely these portents of growth. If the economy runs too hot, the thinking goes, the Fed will be forced to step in, snatch away the punch bowl and perhaps even force a recession. Long the sole drivers for recovery as fiscal policymakers dozed, monetary policy makers might ruin the fun precisely as fiscal policy – perhaps too late – shakes itself awake. (See also, Stock Market Woes: The Recovery Eats Its Children.)

Adding to the uncertainty, the Fed has a new chair, Jerome Powell, a rare non-economist who Trump appointed rather than bowing to tradition and reappointing the incumbent dove Janet Yellen. Powell betrayed a bit of hawkishness on Feb. 27, when he told Congress that inflation is "moving up to target" and knocked 1.3% off the S&P 500. With the economy at full employment and rates low by historical standards, that can only mean more hikes and – unless investors are jumping their own shadows – a rebuff to an economy that is only just regaining its gumption.